Simple Steps to Catching Big Profits on FOREX

If you want to catch the big profits in forex trading you need to trend follow forex trends which are longer term. Here we are going to give you a 3 step simple method which if you use it correctly, will help you catch every major forex trend and lead you to long term currency trading success.Most novice traders don't bother trying to trend following forex longer term - instead they try forex scalping or day trading.

These methods focus the trader on small moves and they hope to catch small profits however as most short term moves are random, this leads to equity wipe out.The other choices are swing trading and long term forex trend following and this article is all about the latter method. If you look at any forex chart, you will see long term trends that last for months or years. These moves can and do yield big profits - here we will outline a simple method to catch them.

Breakouts

By far the best way of catching the big moves is to use a forex trading strategy based around breakouts. A breakout is simply a move on a forex chart where a new high or low is made and resistance or support is broken.It's a fact that most major moves start from new highs or lows.While it might appear that you are not buying or selling at the best level, you are in terms of the odds of the trend continuing. Most forex traders make the mistake of waiting for the breakout to come back and get in at a better price but these traders never get on board. The reason for this is if a breakout occurs, then you have a new strong trend and a pullback is not very likely to occur.Most traders don't buy or sell breakouts and that's exactly why it's such a powerful method.The only point to keep in mind is a support or resistance which is broken, should be valid and that means at least 3 points in at least 2 different times frames. The more tests and the wider the spacing between the tests the more valid the level is.

Confirmation

Of course not every breakout continues and some reverse, these are false and can cause losses. You therefore need to confirm each move. All you need to do to achieve this is to put a few momentum indicators in your forex trading system to confirm your trading signal.These indicators give you an idea of the strength and velocity of price and there are many to choose from. We don't have time to discuss them here (simply look up our other articles) but two of the best are - the stochastic and Relative Strength Index RSI.

Stops and Targets

Stop levels are easy with breakouts - Simply behind the breakout point.If you have a big trend then you need to be careful you can milk it, so don't move your stop to soon and keep it outside of normal volatility. If it is a big move, trailing stops should be held a long way back and the 40 day moving average is a good level to use.You have to keep in mind that when the trend does eventually turn you are going to give some profit back. You don't know when the trend is going to end, so don't predict.It's ok to give a big back, as that's the nature of trading forex. Keep in mind if you got 50% of every major trend you would be very rich. When you are long term trend following you have accept giving a bit back and taking dips in open equity as the trend develops - this is noise and does not affect the long term trend.The above is a simple way to trend follow forex and catch the high odds moves that yield the big profits. If you are learning forex trading and want a simple method that is robust and will help you catch every major move, then you should base your Trading on the above method.

Forex Money Management

Forex money management is one of the most important things you can learn before you actually begin making live trades.The money management principles discussed here will teach you how to avoid the costly mistakes many new traders make, often to the degree that they lose their entire investment on the first handful of trades.Psychology is really the most important factor to money management in forex. You have to be able to separate yourself from any emotional attachment you may have to your money. This is not very easy to do, but it works and it can be done.If you allow yourself to become emotional on a trade, you will not exit the trade properly, and this could mean holding on to a trade when you should have let it go, or letting go before the trade had a chance to turn profitable.

First and foremost, you should consider leverage and risk. It is advisable that you never risk more than two percent of your account balance on any trade. However, some go further and allow for as much as ten percent, but never more than that. This gives you the ability to withstand market fluctuations, and if the trade goes bad, you still have money to try again. You should never operate under the assumption that you will profit from every trade. You should also plan for losses. Therefore, most traders will tell you that the best thing to do is to keep your gains large and your losses small. Develop your trading strategy around this idea.Keep track of your gains and losses. Keeping accurate and detailed records of your account activity will allow you to see whether or not the strategy is working, or if it needs to be re-built.Never go blindly into trading without a way to keep track of results. You will lose all of your funds and never understand why it happened.Finally, it is highly advisable that you first practice a strategy on a demo account. Nearly all brokers offer a virtual account whereupon you make trades in real-time, but with imaginary money, so nothing is risked.

This is the best way to test a strategy before you put your real money on the line.However, be careful, once again, of the psychology of trading. When you play with fake money, nothing is risked. When real money is on the line, you must not get emotional. If you do, you will find yourself with very different results, most likely losses, than you had with the demo account.

Trade With Sufficient Captial

One of the worst blunders that forex traders can make is attempting to trade without sufficient capital.The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or pattern

Exercise Discipline

Discipline is probably one of the most overused words in forex trading education. However, despite the clich¨¦, discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan.It¡¯s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you¡¯ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.

Employ Risk-to-Reward Ratios

The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)

40/20 (2 to 1) = 67%,

40/40 (1 to1) = 50%,

40/60 (1 to 1.5) = 40%,

40/80 (1 to 2) = 33.5%,

60/20 (3 to 1) = 75%,

60/60 (1 to 1) = 50%,

60 /90 (1 to 1.5) = 40%,

60/120 (1 to 2) = 33.5%

Important Note

Never risk more pips on a trade then you plan to make. It doesn¡¯t make sense to risk 100 pips in order to make only 10. Why? See below example.

Profit taking level (pips): 10

Stop used or pips at risk: 100

You win 10 times which makes 100 winning pips. You ONLY lose once and have to give back all profits!!!

This type of trading makes no sense and you will lose on the long term guaranteed!

Advantages and Disadvantages of Forex Trading

Foreign Exchange, Forex or FX is one of the world’s largest financial markets dealing in real-time exchange of currencies of different countries. This currency exchange market has a greater volume of buyers and sellers, than in any other financial market of the world.With major trading centers at Sydney, London, Frankfurt, Tokyo and New York, Forex is the only financial market, which is open 24 hours a day, 5.5 days a week, across the globe. One of the most popular speculation markets, Forex is a market well known for its huge volume, superior liquidity, as well as the steady trading prospects. Also attractive is high levels of Leverage, one of the unique features offered by the Forex market.

Advantages of Forex trading

High leverage

Starting from a minimum of 100:1, Forex markets offer its traders with huge amounts of leverage which means that fat profits can be produced by investing small amounts of deposits.

No commission

If dealing with a financial market on daily basis, the regular investors or traders are the ones who are really benefited by the “free of commission” trading. The currency trading market lets its traders keep a whole 100% of their trading profits.

Superior liquidity

With most of the currency transactions comprising of 7 main currency pairs, the huge volume and the global trading aspect helps these currencies exhibit price stability, little slippage, narrow spreads and high levels of liquidity.

Profitability

Being an over the counter market, the trading done at Forex can be known as “over the counter” trading, wherein, a trader always buys one currency and sells of the other one in real time. There is no organizational prejudice in the market and every investor has the equal prospects for profit in it.

24 hours trading

Forex currency trading market offers its traders with a 24 hour trading opening, wherein, a Forex investor can trade ant any time of the day, whatever suits him/her, as the market is open for trading 24 hours a day, from Sunday 5:00 pm (ET) to Friday 4:30 pm. This gives the Forex traders a choice to opt for timing for the trade according to their convenience.

Disadvantages of Forex trading

High Leverage

While high leverage serves as an advantage to attract traders to the market, it can at times also act as a disadvantage for them. With such high levels of leverage available to traders in the Forex market, comes an equally high level of danger.This can be true for the high stake positions which carry along with them, too much risk, leading to margin calls. This is where efficient money management comes into play for playing safe.

24 hours market

Although it is convenient for the trader to trade whenever it is suitable to him, it can be a rather tough job too. This is because, at times, it is not possible for an individual trader to keep track of the Forex market, 24 hours a day. This is where a broker comes into the picture. Retail or individual investors should try taking help from a professional broker rather than doing all the dealings himself straight with the huge market. The broker will be an experienced professional who will act as an equal in your transactions, keeping you informed and updated about minute to minute details and fluctuations, and even guide you about the conditions, when to and when not to trade in the market. Like every other financial market, Forex market also has its share of advantages and disadvantages. But keeping in mind the two can surely help a trader become more vigilant and aware of what to expect while trading Forex.

Making profit from Forex

It doesn't take a financial gen The psychological basis for successful trading is indeed a delicate subject. No one we have ever heard of has been able to pinpoint exactly what it is that gives one trader success while another trader fails. Although some claim to have done this, coming up with an attribute profile of the "average" winner, no one we know of has identified a set of common denominators among professional winning traders. Besides, which of us is "average?" Is it you?
Winning in the markets seems to involve a fine balance of traits that differ among winning traders. To make the identification of winning traders even more complicated, there seems to be a distinction between those traders who can successfully trade their own money and those traders who can successfully trade the money of others. I have met both.
Two of the most successful money managers I know personally began by trading managed money. They began trading other people’s money for lack of sufficient money of their own with which to trade. Later in their careers, when they did have sufficient money with which to trade their own account, they found that they failed miserably. They were not able to trade their own money with any degree of success. More than that, when they traded their own money simultaneously with trading managed money, they failed at both.
Upon further investigation, and after speaking with a number of traders who have tried both, I discovered that there are many traders who are successful at trading managed money, but who can’t trade their way out of their hat when trying to trade their own money. Invariably, upon further probing, some admitted that they were much more daring and courageous with other people’s money than they were when the money was their own. It doesn't take a financial genius to figure out that the biggest attraction of any market, or any financial venture for that matter, is the opportunity of profit. In the Forex market, profitability is expressed in a number of ways.
First of all, just to set the record straight, you don't have to be a millionaire to trade Forex. Unlike most financial markets, the Forex market allows you to start trading with relatively low initial capital. At eToro, you can start trading Forex with as little as $25!
Right about now you're probably asking yourself: "So how am I meant to make any serious money with such a low initial investment?" The Forex market has just the thing for you, because it allows you to use leveraged trading. Leveraged trading lets you open positions for tens of thousands of dollars while investing sums as small as $25. This means that Forex trading has the profit potential of tens and even hundreds of percent a day!
What is also unique about the Forex market is that any sort of movement is an opportunity to profit. Whether a currency is crashing or soaring, there is profit to be made, since you always have the option of buying or selling the currency of your choice. Unlike the stock market, you are not limited to speculating on rising stocks, and a falling market is just as good for business as a rising market.

Foreign exchange market turnover in 2007

1. Foreign exchange market turnover

The April 2007 data on turnover in traditional foreign exchange marketshighlight several important features of the evolution of these markets.

First, average daily turnover has grown by an unprecedented 69% since April 2004,to $3.2 trillion (Table B.1). This increase was much stronger than the oneobserved between 2001 and 2004. Even abstracting from the valuation effectsarising from exchange rate movements, average daily turnover rose by 63%.

Second, growth in turnover was broad-based across instruments. More than half of the increase in turnover can be accounted for by the growth in foreign exchange swaps, which rose 80% compared with 45% over the previous three-year period. Changes in hedging activity may have been one factor underlying the increasing importance of foreign exchange swap instruments. Growth in the turnover of outright forward contracts also picked up significantly to 73%. In contrast, turnover in spot markets increased by 59%, which is somewhat lower than the growth in turnover in the previous three-year period.
Third, the composition of turnover by counterparty changed substantially.Transactions between reporting dealers and non-reporting financial institutions,such as hedge funds, mutual funds, pension funds and insurance companies, more than doubled between April 2004 and April 2007 and contributed more than half of the increase in aggregate turnover (Table B.3). Factors underlying the strength of this segment include strong investor activity in an environment of trending exchange rates and low levels of financial market volatility, a trend shift among institutional investors with a longer-term investment horizon towards holding more internationally diversified portfolios and a marked increase in the levels of technical trading. Turnover between reporting dealers and non-financial customers also more than doubled. Consequently, the share of turnover resulting from transactions between reporting dealers, ie the interbank market, fell to 43%, despite growth in this segment being slightly lower than in the previous three-year period.
Fourth, the currency composition of turnover has become more diversified over the past three years (Table B.6). The share of the four largest currencies fell, although the US dollar/euro continued to be the most traded currency pair. The most notable increases in share were for the Hong Kong dollar, which has benefited from being associated with the economic expansion of China, and the New Zealand dollar, which has attracted attention from investors as a highyielding currency. More broadly, the share of emerging market currencies in total turnover has increased, to almost 20% in April 2007. Finally, the geographical distribution of foreign exchange trading did not change significantly (Table B.2). Among countries with major financial centres, Singapore, Switzerland and the United Kingdom gained market share, while the shares of Japan and the United States dropped. In some cases, changing shares reflected the relocation of desks.

2. OTC derivatives market turnover

Activity in OTC derivatives markets was vibrant in April 2007. Average daily turnover in OTC foreign exchange and interest rate contracts went up by 73% relative to the previous survey in 2004, to reach $4,198 billion in April 20071 (Table C.1). This corresponds to an annual compound rate of growth of 20%, which is higher than the 14% growth recorded since the derivatives part of triennial survey was started in 1995. Activity in foreign exchange derivatives rose by 78%, slightly above the rate of increase reported for the spot market
(59%). More mod rate growth was recorded in the interest rate segment
where turnover went up by 64%.

3. OTC derivativ s notional amounts outstanding and gross market values

Positions in OTC derivatives grew at an even more rapid pace than turnover. Notional amounts outstanding went up by 135% to $516 trillion at the end of June 2007 (Table C.5). This corresponds to an annualised compound rate of growth of 33%, which is higher than the approximately 25% average annual rate of increase since the current format of the triennial survey was established in 1998. Growth accelerated in all risk categories. The highest rate of increase was reported in the credit segment of the OTC derivatives market, where positions
expanded to $51 trillion, from under $5 trillion in the 2004 survey. Notional amounts outstanding of commodity derivatives rose more than sixfold to $8 trillion, although this may reflect a change in the degree of underreporting as well as a genuine increase in positions. Less extreme, but still high rates of growth were reported for the more traditional types of risk traded on the OTC derivatives market. Open positions in interest rate contracts increased by 119% to $389 trillion, and those in equity contracts by 111% to $11 trillion. Growth in
notional amounts outstanding of OTC foreign exchange derivatives was less brisk at 83%, taking the volume of open positions in such contracts to $58 trillion. Notional amounts outstanding provide useful information on the structure of the OTC derivatives market but should not be interpreted as a measure of the riskiness of these positions. While a single comprehensive measure of risk does not exist, a useful concept is the cost of replacing all open contracts at
the prevailing market prices. This measure, called gross market value, increased at a considerably lower rate (74%) than notional amounts during the reporting period, to $11 trillion at the end of June. Discrepancies between growth in notional amounts and in gross market
values have also been recorded in previous surveys. As a consequence, the ratio of market values to notional amounts fell to 2.2%, from 3.1% in 2001. One reason why the replacement values of derivatives positions increased at a lower rate than face values is that long-term government bond yields in the major currencies, which are the main driver of the market value of interest rate swaps, on balance changed by only very small amounts between mid-2004 and
mid-2007. Since interest rate swaps, similar to most other derivatives contracts other than options, tend to be priced such that their initial value is zero, stable long-term rates are usually associated with low replacement values. Implied volatilities, an important input for the market value of options, also remained stable at a low level between the 2004 and the 2007 surveys. By contrast, stock prices rose sharply in most regions, which is consistent with the fact that
the replacement value of equity contracts increased at a much faster rate (278%) than notional amounts (111%).

Intermarket Analysis of Forex

What is intermarket analysis and why will it work for us in our trading?

To see this clearly, we have to understand two things.
The purpose of analyzing markets is to forecast market direction—more simply, to identify trends.
The traditional market approach in forecasting trends is single-market analysis, which is divided into two analytic viewpoints—fundamental and technical.
Fundamental analysis forecasts market direction based on economic factors affecting a market. Technical analysis bases its forecasts of market direction on the idea that all of the internal and external factors affecting a market, at a given point in time, are factored into that market’s price.

The problem with the single-market analytic approach is that it is archaic. Single-market analysis, the predominant approach to analyzing U.S. markets for more than 100 years, works on the assumption that markets trade independently of one another. Although this was true for financial markets, it is no longer the case.

The rise of the Internet (instantaneous information transmission), computerized trading (trading simultaneous markets immediately), software market analysis (the ability to analyze multiple markets immediately), and, most important, the interconnectedness of global markets (the threaded influence of market upon market in all parts of the world) all make single-market analysis alone a less effective tool for forecasting trends. Particularly, single-market technical analysis is less effective because it relies on lagging indicators that view a market retrospectively to identify re-occurring patterns that then form trends. To be clear, single-market analysis is not wrong, nor is it irrelevant for identifying trends; alone, it is simply insufficient.

Intermarket analysis empowers traders to make more effective trading decisions based upon the linkages between related financial markets. By incorporating intermarket analysis into your trading strategies, rather than limiting your scope to each individual market, these relationships and interconnections between markets will work for you rather than against you.

Predictions in Forex Market

The Forex Market trades an estimated $1.5 to $2.5 trillion a day. No one really knows what the actual figure is because there is no central marketplace for keeping tabs on all of the forex transactions around the world. The forex market is massive, dwarfing the $30 billion a day traded at the New York Stock Exchange. In fact, forex trading exceeds the combined volume of all the major exchanges trading equities, futures, and other instruments around the globe.
Although professional traders implementing sophisticated strategies account for most of the trading in the huge forex market, participation by individual traders has grown tremendously in recent years with the proliferation of the Internet, enhancements in personal computers and trading software, the launch of dozens of cash forex firms taking advantage of online trading, and the globalization of markets in general. The introduction of the euro on January 1, 1999, and the weakness of the U.S. dollar after peaking in 2001 also contributed to the surge of interest in forex trading. Increased numbers of individual traders became aware of the role of forex in global markets with an eye toward profiting as currency trends unfolded.

Why Forex Trading?
The first question you may have is, “Why trade forex? Is not forex something that interests only bankers and big money managers?” The answer is simple: No, it is not a privilege of bankers. Anyone can earn from this huge Market!
The main characteristics of forex trading are: Diversification, Global Market, Twenty-four-hour Trading, Electronic Trading, Liquidity, Leverage, Simplicity, Active Price Movement.

How can we make Accurate Forex Predictions?
Historically, the methods that have been used by traders to analyze financial markets in an effort to identify and forecast the direction of price trends have been divided into two distinct approaches: Fundamental Analysis and Technical Analysis.
For many years we tried to analyse the way the Global Market "behave". We have now prooved that markets are interrelated and that development in one market is likely to have repercussions in other markets.
This is the heart of what is called Intermarket Analysis.
We have also managed to define the correlating Markets as well as the coefficients of correlation. This scientific Analysis guarantees the reliable prediction of the tendencies of Global Market and especially the Forex Market.

Forex Trading History

Trading, as we use the term today, has been in practice since the era of Babylonians. Yes, it’s true! Although at that time, it was referred to with a different name altogether… The Barter system! That’s right. During earlier times, goods were exchanged in return for goods. And slowly, people started to exchange goods in return for foreign currencies of that time to make their trade a lot easier. This resulted in the increasing need of every trader to own a foreign currency as per the demands of his trade.
History of Currency or Forex trading can be traced back to the Middle Age times. It is believed that an international investment banker developed the method of using checks and bills to trade. However, starting from the middle ages, a lot has changed and evolved, creating the biggest currency trading market in the world today. But the major changes which really shaped the trading scenario for the global currency market to make it look as we see today were the ones which occurred during the twentieth century.
By the late1930s, London was being considered as the world's foremost foreign exchange center. One of the main reasons behind this was that during that time, the British pound was regarded as the world's standard trading exchange. Also, the British pound had started to play a role of the main “Reserve” currency being held by many countries back then.
But the scenario took a dramatic turn after the Second World War, when the British economy was almost smashed resulting in the rise of the United States dollar. The USD then started to climb the path to success as it rose to become the world's major trading as well as reserve currency. In July 1944, the Bretton Woods agreement was attained on the application of USA. The convention which was being held in Bretton Woods, New Hampshire for this accord discarded John Maynard Keynes pitch for a new world reserve trade backing an arrangement built on the US Dollar. As a result to the Bretton Woods contract, a system of fixed exchange rates was decided, which resulted in partially re-establishing the Gold Standard and fixing the USD price at $35.00 per 1 ounce of Gold. While the USD was priced against Gold, the other major currencies were set up against the USD itself. The Second World War and the series of events which followed are mainly believed to have played an instrumental role in shaping today's Forex market situation.
Early 1980’s saw London becoming the key center of the Euro-dollar market, and till today, London efficiently remains the major offshore market. Along with the USD and Euro, a number of other currencies including the Japanese Yen are also counted amongst the world’s major reserve currencies.
From back in the year 1978, when Forex trading displayed revenue of about 5 billion US dollars on per day basis, till date, the per day Forex trading turnover has now crossed the figure of a whooping 1.5 trillion US dollars.

Mini Forex trading

Forex trading or foreign exchange is biggest economic market with trillions of dollars being traded by traders and brokers across the world. With so much of money and excitement being on line, Forex is the most sorted option for traders and money makers. Fact that Forex provides big money and big opportunities does not makes it just a platform for experienced traders, as with a mini Forex trading even new and amateur people can trade and earn good.
Mini Forex trading or mini Forex account is also known as part time trading which is designed to support people who have not much of an experience in the world of Forex.
What makes mini Forex trading different and a benefit for a newcomer is the fact that it requires small amount of input and also has low rate of risk involved as compared to the bigger Forex market. What more? In spite of benefit of being able to trade small and safe you also get the facilities like Forex tools, charts, stop loss and leverage.
With leverage playing the main role in mini Forex trading, you just have to invest an amount of 250 to 300 dollars. Also, with the kind of leverage offered in a mini Forex trading a novice can easily trade for utmost of 5 lots. With a leverage of 200:1 and a deposit as small as $50 gives a trader a chance to trade approximately $10,000.
A mini account provides flexible leverage and low margin facility also, the pip is just $1 reducing any risk. For example in a standard or bigger Forex account when you lose 20 pips you face a loss of 200 dollars, but with pip value being $1 (in mini Forex account) losing 20 pip means losing just 20 dollars.
In spite of the fact that mini Forex trading or mini Forex account is safe and less risky, a trader needs to be careful and well aware of his/her steps while trading in Forex. Such as, never avoid risk management tools like implementing a ‘stop loss order’ in your Forex dealing. Use Forex charts and analyses methods to decide your move. In beginning trade or deal just one pair at one time and do not go on purchasing or dealing with two or more pairs to earn more, as objective of mini Forex trading is not earning big but to teach a newcomer moves and trends of easy and safe money making in foreign exchange market.
Multiple trading strategies, advice and news on trading moves and multilingual customer support are few of those characteristics you need to keep in mind while choosing for mini Forex trading company or platform.
With a deposit as small as $300 and a leverage of 200:1, Forex mini trade offers all the characteristics of big Forex trading along with broker facility and low risk, low pips and much more. Thus, mini Forex trading is the best trade learning tool for a new comer or an amateur trader who wishes to make it big in the Forex market.

Avoid Mistakes in Forex trading

Forex trading procedure being the purchase of one currency against another has been taken to be too easy by many who jump into trading without any training or experience. Full of benefits, Forex or foreign exchange is a roller coaster ride with lots of thrills if everything goes well. Often, people try to take care of things to do but with a proper Forex trading course you get to know both, things to do and things not to while trading in Forex.
Usually people have the tendency to make mistakes but to avoid those mistakes means a sure shot win over them. The right Forex trading course helps you to know your errors and to learn from them.
While some mistakes can be avoided by blaming it on wrong moves but some mistakes can be troublesome leading to heavy losses, thus it is advisable never to ignore a mistake. Some of the most common mistakes in trading Forex are:

Forex Trading without any knowledge: Many traders enter the Forex trading with the minimum knowledge and a zero experience. With a trading course you get to correct this mistake by gaining complete understanding Forex and its moves

Forex Trading without any entrance and exit point: When a trader starts trading without any definite or calculated entrance pint and any planned exit point, then that trader is trading without any trading system and moving towards great loss. In trading course you are taught the importance and implementation of trading system in your Forex moves.

Forex Trading without any plan and definite trading strategy: Trading is a serious business involving great amount of money, thus requires great planning and strategy making.

Forex Trading every move just to win i.e. to let the emotional barriers stop you: Often, when someone starts winning few stakes, he or she tends to get driven by it and starts trading more and more. While some makes blunder due to over confidence, there are also some who come under pressure of losing. For efficient trading it is necessary to trade without any emotion inside, as blues or excitement tends to make a trader react without much analysis.

Forex Trading with an unreliable broker: One major mistake many new comers tend to make I of choosing a broker in a hurry. Without surveying for efficient brokers and services provided by them and without cross checking their credibility, trading can be a big mistake and may cause harm.

Mistakes are possible while trading but it is advisable that while you trade, do try to take care of those mistakes which are not just silly but can also be avoided with sensible approach.

Foreign Exchange as opposed to other markets

The Foreign Exchange market (Forex) is the largest financial market in the world. Its volume far exceeds that of any other market, and its inherent global reach is limitless. The market that trades over 1.5 trillion dollars daily is free from manipulation of any kind due to its vast size and purely democratic form. The Foreign Exchange market operates as a basic supply and demand model for the world’s major currencies, and even government cannot control the direction of the market. Many analysts regard the Forex market as the most efficient market in the world. The market has no central, physical location such as a pit exchange (i.e. NYSE, CBOT). Rather, the market exists as an electronically linked network of exclusive market participants.

Often, Foreign Exchange is misconstrued for trading currencies through the commodities futures exchanges. However, there are distinct differences and advantages when trading currencies in the cash or “spot” market. First of all, the commodities market trades contracts rather than straight cash, therefore restricting the quantities to specific increments with preset time periods and expiration dates. When you trade in the Interbank market (true Foreign Exchange), you are free from quantity and time restrictions, and have a greater breadth of currencies to choose from in trading. Whereas the futures market trades only the world’s largest currencies, excluding profit potential from smaller currency fluctuations (otherwise known as exotic currencies), the Interbank market can trade virtually any currency. This also provides the opportunity to place crosses, trading any one nation’s currency against any other nation’s currency, as opposed to the futures market where almost all currency contracts trade against the U.S. Dollar only. With respect to fills and market liquidity, the Foreign Exchange market is superior to all other markets. When trading in the Interbank market, all transactions execute instantly since trading occurs on an electronic exchange. By contrast, when placing an order for a futures contract, your order most likely passes through a broker, an order desk, a trading floor, a runner, and finally a pit for bidding. In this way, bad fills are not unusual. Rest assured that this scenario is non-existent in the Foreign Exchange market. Another advantage of prime importance is the degree of liquidity the market offers. Interbank traders are at a huge advantage given the 24-hour market in which they trade. Strategists can capture fast breaking and overnight markets and do not have to race orders to beat a closing bell. Trading in the Foreign Exchange market is an extremely efficient means of hedging against adverse price fluctuations of mutual funds as well as stocks in your portfolio. Remember, any funds invested offshore, including companies’ funds of whose stock you may hold are vulnerable to currency rate changes. However, changes in exchange rates between currencies provide opportunity for profit in the Interbank market, whereas instability of a stock is detrimental to that stockholder’s portfolio. The Foreign Exchange market, unlike stocks, does not rely on projected earnings and growth potential of a nation or its currency (as stock prices do a company). Rather, Forex strategists seek to profit from exchange rate changes, transforming instability into an exciting, lucrative investment opportunity.

Market Dynamics in Forex Trading

The breadth, depth, and liquidity of the market are truly impressive. It has been estimated that the world's most active exchange rates like EURUSD and USDJPY can change up to 18,000 times during a single day.
Somewhere on the planet, financial centers are open for business, and banks and other institutions are trading the dollar and other currencies, every hour of the day and night, aside from possible minor gaps on weekends. In financial centers around the world, business hours overlap; as some centers close, others open and begin to trade.
The foreign exchange market follows the sun around the earth. Each business day arrives first in the Asia-Pacific financial centers; first Wellington, New Zealand, then Sydney, Australia, followed by Tokyo, Hong Kong, and Singapore. A few hours later, while markets remain active in those Asian centers, trading begins in Bahrain and elsewhere in the Middle East. Later still, when it is late in the business day in Tokyo, markets in Europe open for business. Subsequently, when it is early afternoon in Europe, trading in New York and other U.S. centers starts. Finally, completing the circle, when it is middle or late afternoon in the United States, the next day has arrived in the Asia-Pacific area, the first markets there have opened, and the process begins again.

1. Spot rate
A spot transaction is a straightforward (or outright) exchange of one currency for another. The spot rate is the current market price or 'cash' rate. Spot transactions do not require immediate settlement, or payment 'on the spot'. By convention, the settlement date, or value date, is the second business day after the deal date on which the transaction is made by the two parties.

2. Bid & ask
In the foreign exchange market (and essentially in all markets) there is a buying and selling price. It is important to perceive these prices as a reflection of market condition.
A market maker is expected to quote simultaneously for his customers both a price at which he is willing to buy (the bid) and a price at which he is willing to sell (the ask) standard amounts of any currency for which he is making a market.
Generally speaking the difference between the bid and ask rates reflect the level of liquidity in a certain instrument. On a normal trading day, the major currency pairs EURUSD, USDJPY, USDCHF and GBPUSD are traded by a multitude of market participant every few seconds. High liquidity means that there is always a seller for your buy and a buyer for your sell at actual prices.

3. Base currency and counter currency
Every foreign exchange transaction involves two currencies. It is important to keep straight which is the base currency and which is the counter currency. The counter currency is the numerator and the base currency is the denominator. When the counter currency increases, the base currency strengthens and becomes more expensive. When the counter currency decreases, the base currency weakens and becomes cheaper. In telephone trading communications, the base currency is always stated first. For example, a quotation for USDJPY means the US dollar is the base and the yen is the counter currency. In the case of GBPUSD (usually called 'cable') the British pound is the base and the US dollar is the counter currency.

4. Quotes in terms of base currency
Traders always think in terms of how much it costs to buy or sell the base currency. When a quote of 0.9150 / 53 is given that means that a trader can buy EUR against USD at 0.9153. If he is buying EURUSD for 1'000'000 at that rate he would have USD 915'300 in exchange for his million Euro. Of course traders are not actually interested in exchanging large amounts of different currency, their main focus is to buy at a low rate and sell at higher one.

5. Basis points or 'pips'
For most currencies, bid and offer quotes are carried down to the fourth decimal place. That represents one-hundredth of one percent, or 1/10,000th of the counter currency unit, usually called a 'pip'. However, for a few currency units that are relatively small in absolute value, such as the Japanese yen, quotes may be carried down to two decimal places and a 'pip' is 1/100th of the terms currency unit. In foreign exchange, a 'pip' is the smallest amount by which a price may fluctuate in that market.

6. Euro cross & cross rates
Euro cross rates are currency pairs that involve the Euro currency versus another currency. Examples of Euro crosses are EURJPY, EURCHF and GBPEUR. Currency pairs that involve neither the Euro nor the US dollar are called cross rates. Examples of cross rates are GBPJPY and CHFJPY. Of course hundreds of cross rates exist involving exotic currency pairs but they are often plagued by low liquidity. Ever since the Euro the number of liquid cross rates have decreased and have been replaced (to a certain extent) by Euro crosses.

Main Markets in Forex Trading

Foreign exchange is traded essentially in two distinctive ways. Over an organized exchange and 'over the counter'. Exchange traded foreign exchange represents a very small portion of the total foreign exchange market the great majority of foreign exchange deals being traded between banks and other market participants 'over the counter'.

1. Exchange traded currencies
In the case of an organized exchange like the Chicago Mercantile exchange (CME) in the US, standardized currency contract sizes that represent a certain monetary value are traded in the International money market (IMM). A central clearing house organizes matching of transactions between counter-parties.

2. Forex market
In comparison the over the counter market is traded around the world by a multitude of participants and price quality, reputation and trading conditions determine who a participant wishes to trade with. It is probably the most competitive market in the world and brokers must insure they live up to the highest standards of service and be compliant with market standards and practices if they want to acquire new customers and retain their existing ones. In 1998 a survey under the auspices of the Bank for International Settlements (BIS), global turnover of reporting dealers was estimated at about USD 1.49 trillion per day. In comparison, currency futures turnover was estimated at USD 12 billion.
Among the various financial centers around the world, the largest amount of foreign exchange trading takes place in the United Kingdom, even though that nation's currency, the British pound is less widely traded in the market than several others. The United Kingdom accounts for about 32 percent of the global total; the United States ranks a distant second with about 18 percent, and Japan is third with 8 percent.

Origin of Forex

In order to gain a complete understanding of what foreign exchange is, it is useful to examine the reasons that lead to its existence in the first place. Exhaustively detailing the historical events that shaped the foreign exchange market into what it is today is of no great importance to the forex trader and therefore we happily will omit lengthy explanations of historical events such as the Bretton Woods accord in favor of a more specific insight into the reasoning behind foreign exchange as a medium of exchange of goods and services.
Historically our ancestors conducted trading of goods against other goods this system of bartering was of course quite inefficient and required lengthy negotiation and searching to be able to strike a deal. Eventually forms of metal like bronze, silver and gold came to be used in standardized sizes and later grades (purity) to facilitate the exchange of merchandise. The basis for these mediums of exchange was acceptance by the general public and practical variables like durability and storage. Eventually during the late middle ages, a variety of paper IOU started gaining popularity as an exchange medium.
The obvious advantage of carrying around 'precious' paper versus carrying around bags of precious metal was slowly recognized through the ages. Eventually stable governments adopted paper currency and backed the value of the paper with gold reserves. This came to be known as the gold standard. The Bretton Woods accord in July 1944 fixed the dollar to 35 USD per ounce and other currencies to the dollar. In 1971, president Nixon suspended the convertibility to gold and let the US dollar 'float' against other currencies.
Since then the foreign exchange market has developed into the largest market in the world with a total daily turnover of about 1.5 trillion USD. Traditionally an institutional (inter-bank) market, the popularity of online currency trading offered to the private individual is democratising foreign exchange and widening the retail market.

Working of Forex market

The forex market is the largest financial market in the world, trading around $1.5 trillion each day. Trading in the forex is not done at one central location but is conducted between participants through electronic communication networks (ECNs) and phone networks in various markets around the world. The market is open 24 hours a day from 5pm EST on Sunday until 4pm EST Friday. The reason that the markets are open 24 hours a day is that currencies are in high demand. The international scope of currency trading means that there are always traders somewhere who are making and meeting demands for a particular currency. Currency is also needed around the world for international trade, as well as by central banks and global businesses. Central banks have relied on foreign-exchange markets since 1971 - when fixed-currency markets ceased to exist because the gold standard was dropped. Since that time, most international currencies have been "floated", rather than pegged to the value of gold. At each second of every day, countries' economies are growing and shrinking because of economic and political instability and infinite other perpetual changes. Central banks seek to stabilize their country's currency by trading it on the open market and keeping a relative value compared to other world currencies. Businesses that operate in many countries seek to mitigate the risks of doing business in foreign markets and hedge currency risk. To do this, they enter into currency swaps, giving them the right, but not necessarily the obligation to buy a set amount of a foreign currency for a set price in another currency at a date in the future. By doing this, they are limiting their exposure to large fluctuations in currency valuations. Due to the importance of currencies on the international stage there needs to be round-the-clock trading at all times. Domestic stock, bond and commodity exchanges are not as relevant, or in need, on the international stage and are not required to trade beyond the standard business day in the issuer's home country. Due to the focus on the domestic market, demand for trade in these markets is not high enough to justify opening 24 hours a day, as few shares would be traded at 3am, for example. The ability of the forex to trade over a 24-hour period is due in part to different time zones and the fact it is comprised of a network of computers, rather than any one physical exchange that closes at a particular time. When you hear that the U.S. dollar closed at a certain rate, it simply means that that was the rate at market close in New York. But it continues to be traded around the world long after New York's close, unlike securities. The forex market can be split into three main regions: Australasia, Europe and North America. Within each of these main areas there are several major financial centers. For example, Europe is comprised of major centers like London, Paris, Frankfurt and Zurich. Banks, institutions and dealers all conduct forex trading for themselves and their clients in each of these markets. Each day of forex trading starts with the opening of the Australasia area, followed by Europe and then North America. As one region's markets close another opens, or has already opened, and continues to trade in the forex market. Often these markets will overlap for a couple hours providing some of the most active forex trading. So if a forex trader in Australia wakes up at 3am and decides to trade currency, they will be unable to do so through forex dealers located in Australasia but they can make as many trades as they want through European or North American dealers. With all of this action happening across borders with little attention to time and space, the sum is that there is no point during the trading week that a participant in the forex market can't potentially make a currency trade.

Forex Market in United States

Currency: U.S. Dollar
Common Name: Dollar
Quotation Convention: 2 decimal points
Most liquid cross: USD/JPY, EUR/USD
Average Bid/Offer: 3 pips (110.70 / 110.73)3 pips (1.1570 / 1.1573)
1 pip: 0.01 JPY, .0001 USD
Settlement: Transaction plus two days (T+2)

Economic Indicators for the United States

• Consumer Confidence
  
• Consumer Price Index (CPI)
  
• Employment
  
• Employment Cost Index (ECI)
  
• Gross Domestic Product (GDP)
  
• Industrial Production
  
• Institute of Supply Managers
  
• International Trade
  
• Producers Price Index (PPI)
  
• Retail Sales
  

Economic Overview

The U.S. economy is the largest in the world, with a GDP of US$12.37trl, which accounts for almost 21 percent of the world's total gross product. With a 3.5 percent growth rate from 2004 to 2005, the U.S. posted strong growth results compared to other major industrial countries, due in large part to substantial gains in labor productivity. The U.S. has the fourth largest labor force in the world. The estimated per capita GDP is $41,800, which is the second highest in the world.
The U.S. is a leading world industrial power, and is also highly diversified and technologically advanced. The market-based economy is largely service-oriented, with approximately 79 percent of firms in the service sector, 20 percent in industry, and 1 percent in agriculture.
The U.S. imports significantly more than any other country in the world, and is the third largest exporter of goods. The country's most important trade partner is Canada, largely due to the proximity of the two countries. The U.S. has a very large net trade deficit of $799.5bln, which can be attributed to the fact that the U.S. is the largest trading partner for many countries. The U.S.'s external debt exceeded $8.84trl in 2005, the highest of any country.
The response to the terrorist attacks on September 11, 2001, highlighted the strength and resilience of the U.S. economy. The war and the U.S. occupation of Iraq led to considerable shifts of national resources to military funding. Long-term issues for the U.S. include insufficient investment in the country's economic infrastructure, rapidly rising medical and pension costs for the aging population, skyrocketing energy costs, the large trade and budget deficits, and widening family income gap between the lower and upper economic classes.

Economic Policy Makers and Tools
The Federal Reserve was founded in 1913 as the central bank of the U.S. The Federal Reserve is described as "independent within the government," because its decisions do not have to be ratified by the President or any other member of the executive branch of the government. However, it is subject to regulatory supervision by Congress. The Federal Reserve sets national monetary policy to promote the objectives of maximum employment, stability in the purchase power of the dollar, and moderate long-term interest rates.
The Federal Open Market Committee (FOMC) oversees market operations. The FOMC holds eight annual meetings, in which interest rate changes and economic expectations are announced. The FOMC also forecasts GDP growth, inflation and unemployment rates, which are released by the Federal Reserve in the biannual Monetary Policy Report in February and July. The Monetary Policy Report is followed by the Humphrey-Hawkins testimony, in which the Federal Reserve Chairman responds to questions from members of Congress and the banking committees regarding the contents of the report.
One way that the Federal Reserve manages monetary policy is through the use of open market operations, which are conducted by the Open Market Trading Desk. The Desk purchases and sells government securities based on projections for the supply and demand of Federal Reserve balances. These can be long-term operations, to balance a deficiency or surplus for weeks or months, or short-term operations, to adjust the federal funds rate so that it is near the target rate set by the FOMC. When the Fed purchases securities, interest rates decrease, and when they sell securities, interest rates increase.
The Federal Reserve sets the federal funds rate as a key policy target. This is the interest rate that the Fed charges on overnight loans between banks. The rate is set to maintain price stability and limit inflation. This rate influences other interest rates throughout the U.S. economy, and can vary daily. In order to stay near this rate, the Fed can conduct short-term open market operations.
The U.S. Department of the Treasury also influences economic policy. It is responsible for issuing government debt and for making fiscal policy decisions, including tax levels and government spending. The U.S. Treasury gives instructions to intervene in the foreign exchange market by selling or buying the USD if they feel that the exchange rate of the USD is over or undervalued.

Characteristics and Trends

• The USD is the currency most used in international transactions, and constitutes more than half of other countries' official foreign exchange reserves.
• Many emerging market countries peg their local currency rates to the USD.
  
• Gold is measured in USD; therefore, gold and USD tend to have inverse relationships.
  
• There is a strong positive correlation between the U.S. stock and bond markets and the USD.
  
• U.S. economic policy makers favor a "strong dollar" policy.
  
• Interest Rate Differentials between U.S. treasuries and foreign bonds are a strong indicator of potential currency movements.
  
• The USD Index is used to gauge overall USD strength or weakness.

Forex Market in Switzerland

Currency: Swiss Franc
Common Name: Swiss
Quotation Convention: 4 decimal points
Most liquid cross: USD/CHF
Average Bid/Offer : 4 pips (1.3300 / 1.3304)
1 pip: 0.0001 CHF
Settlement: Transaction plus two days (T+2)

Economic Indicators for Switzerland

• Balance of Payments
  
• Consumer Price Index (CPI)
  
• Gross Domestic Product (GDP)
  
• Measure of monetary supply, tracked by the New York Federal Reserve Bank and reported every Thursday (M3)
  
• Production Index (Industrial Production)
  
• Unemployment Rate
  

Economic Overview

Switzerland is a prosperous and stable modern market economy with the 30th largest overall GDP, but the tenth highest per capita GDP. After annual GDP growth dropped between 2001 and 2003, it experienced small gains in 2004 and 2005. Even with the drops in GDP, unemployment has remained at less than half the European Union's unemployment average. Switzerland's low unemployment rate and highly skilled labor force contribute to the country's steady economic success.
Switzerland is viewed as a safe haven for investors, because it has maintained a degree of confidentiality through the Swiss banking law, which regulates what types of information the banks can disclose. As a result, Switzerland is the world's foremost destination for offshore capital and investors. This has created a large and highly advanced banking and insurance industry that employs about half of the population and comprises more than 70 percent of the total GDP. Since Switzerland's financial industry thrives on its safe haven status and renowned confidentiality, capital flows tend to increase during times of global risk aversion.
Germany is Switzerland's most important trade partner, followed by the U.S., France and Italy. Major exports include machinery, chemicals, metals, consumer products and agricultural products. The country has a trade surplus of US$13.6bln, one of the highest in the world, and a national debt of US$856bln.

Economic Policy Makers and Tools

The Swiss National Bank (SNB) was established in 1907 as Switzerland's independent central bank. The Swiss National Bank strives to maintain price stability, while taking economic development into account. Like other countries, the SNB values price stability for long-term growth and prosperity. The SNB equates price stability with no more than a 2 percent increase in the national consumer price index.
The Swiss National Bank closely monitors exchange rates because excessive strength in the Swiss franc causes inflation. This is especially true in environments of global risk aversion, when capital flows into Switzerland tend to increase. As a result, the SNB typically favors a weak franc, and does not hesitate to intervene in the market.
The SNB's quarterly bulletin includes a monetary policy report for the quarterly assessment of the governing board. The report discusses monetary policy decisions and provides an inflation forecast for the next three years. In its annual financial stability report, released in June, the SNB presents its assessment of the stability of the Swiss banking sector and financial market infrastructure and highlights observable trends in the banking system, financial markets and the macroeconomic environment. The main purpose of the report is to draw attention to weaknesses or imbalances that could threaten the stability of the system.
The Swiss National Bank conducts open market operations to influence monetary policy. Repurchase (repo) transactions are the most important open market tool used by the SNB. With this type of repo, a financial institution sells securities to the SNB, and agrees to repurchase the same type and quantity from the SNB at a later date. The bank pays interest for the term of the agreement. If there are any price fluctuations in the securities, the bank or the SNB must deliver additional securities or cash. Repo terms range from one day to a few months. Other open market tools include foreign exchange swaps and advances against securities, otherwise known as Lombard loans (a common European term for securities-based lending).
In order to implement monetary policy, the SNB sets an interest rate target range for the London Interbank Offered Rate (Libor) rate for three-month Swiss franc (CHF) deposits. The SNB uses repos to supply banks with more or less funds to ensure that the Libor rate remains within the target range. The SNB sets a target range for Libor of one percentage point within which the rate can fluctuate. An increase of the target range signals a tightening of monetary policy, while a reduction signifies an easing of the policy.

Characteristics and Trends

• Because of the confidentiality of the Swiss banking system, the Swiss franc (CHF) is more likely to move as a result of external events rather than domestic economic conditions, because funds move into the country during times of international economic instability.
  
• News regarding Swiss banking regulation changes tends to negatively affect the Swiss economy and the CHF.
  
• Because Switzerland is the fourth largest holder of gold, and gold is also viewed as the ultimate safe-haven form of money, the CHF has almost an 80 percent positive correlation with gold.
  
• The CHF is one of the most popular currencies to sell for carry trades, due to the low interest rates.
  
• Interest rate differentials between the European Union and Swiss futures and foreign interest rate futures are watched closely for indications of potential money flows.
  
• Mergers and acquisitions are common in the Swiss banking and insurance sectors, and can significantly affect CHF spot prices.
  
• The euro/franc (EUR/CHF) is the most commonly traded currency pair involving CHF movements; the USD/CHF has higher illiquidity and volatility. However, the USD/CHF is only a synthetic currency derived from EUR/USD and EUR/CHF, and those pairs are used as leading indicators for trading USD/CHF or to price the USD/CHF level when the currency pair is illiquid. Only during times of extreme global risk aversion will the USD/CHF develop a market of its own.

Forex Market in New Zealand

Currency: New Zealand Dollar
Common Name: Kiwi
Quotation Convention: 4 decimal points
Most liquid cross: NZD/USD
Average Bid/Offer : 5 pips (0.6200 / 0.6205)
1 pip: 0.0001 USD
Settlement: Transaction plus two days (T+2)

Economic Indicators for New Zealand

• Balance of Goods and Services
  
• Consumer Price Index (CPI)
  
• Gross Domestic Product (GDP)
  
• Private Consumption
  
• Producer Price Index (PPI)
  

Economic Overview

New Zealand has a fairly small economy compared to other industrialized nations, with its 2005 GDP valued at approximately US$97.39bln. The country's population is equivalent to half of the population of New York City, although it inhabits an area more than 300 times as large. During the past 20 years, New Zealand's government has transformed the country into an industrialized, free market economy that competes globally. This rapid growth has boosted incomes, increased the technological advancements, and controlled inflation. Per capita income has risen for seven consecutive years, and is now valued at $24,100.
New Zealand depends heavily on trade, especially of agricultural products, to drive the country's growth. Exports of goods and services represent about 20 percent of GDP. The country's trade deficit is US$2.36bln. Due to the small size of the economy and its significant trade activities, New Zealand is highly sensitive to global performance, especially with its key trading partners, Australia, the U.S., Japan and China. New Zealand's national deficit is comparatively small, at US$57.67bln.
Because of New Zealand's small population, increases in migration can have significant effects on its economy. Between 2002 and 2003, the population growth rate increased 2,205 percent. This increase in migration noticeably affected the economy, due to the increase in overall consumer consumption.
New Zealand's GDP is very sensitive to severe weather conditions that can damage farming activities. Recent droughts within the country have injured its economy, but droughts in Australia can also negatively impact New Zealand's economy.

Economic Policy Makers and Tools

The Reserve Bank of New Zealand (RBNZ) is the country's central bank. The RBNZ seeks to maintain the stability and efficiency of the financial system through carrying out monetary policy, promoting and maintaining a sound and efficient financial system, and meeting the currency needs of the public. The RBNZ and its minister of finance outline monetary policy in the Policy Targets Agreement, with the most recent PTA requiring the RBNZ to keep inflation at a medium-term average between 1 to 3 percent.
The Reserve Bank of New Zealand sets the official cash rate (OCR), which is an interest rate used to implement monetary policy and maintain price stability. The OCR is reviewed eight times per year. When an OCR is set, the RBNZ will pay financial institutions an interest rate 0.25 percent below the OCR for money deposited in the bank's settlement accounts. The Reserve Bank of New Zealand also provides overnight cash to banks against good security, charging interest at 0.25 percent above the OCR. The RBNZ does not set a limit on the amount of cash that it will take in or let out at 0.25 percent above or below the OCR. The effect of this is that no bank is likely to offer short-term loans at a rate significantly higher or lower than the official cash rate because other banks would undercut the rate or receive interest at the OCR level. Therefore, the RBNZ is able to lend or borrow overnight money in whatever volumes are needed to keep the market interest rate at the bank's OCR level. By controlling short-term interest rates this way, the Reserve Bank of New Zealand influences short-term demand in the economy, putting upwards or downwards pressure on average prices.
The Reserve Bank of New Zealand also borrows or lends cash through open market operations to offset the government's daily transactions. The RBNZ uses repurchase agreements (repos) to withdraw cash and reverse repos to supply cash. Every banking day at 9:30 a.m., the RBNZ announces the details of its open market operations, including the repurchase date for each of the agreements, and how much it is willing to borrow or lend for each date. Then, for the next 15 minutes, settlement account holders can submit bids, expressed as interest rates. Because these repos are usually for only a few days, the interest rate in a repo tends to be close to the RBNZ's official cash rate. The Reserve Bank of New Zealand announces a minimum rate at which it will lend or a maximum at which it will borrow, depending on whether it is depositing or withdrawing cash on the day. The minimum or maximum is estimated from market rates, and is designed to ensure that the RBNZ conducts transactions at fair market rates. Sometimes its open market operations fail, in that there are not enough acceptable bids to fully offset the government's cash flows. If this happens, the institutions will need to use an overnight repo facility to make up any shortages.

Characteristics and Trends

• The New Zealand economy benefits from a strong Australian economy, due to the proximity of the countries and New Zealand's emphasis on trade.
  
• Interest rate differentials between the cash rates of New Zealand and Australia, and between short-term interest rate yields of New Zealand and other industrial countries, are closely followed.
  
• The NZD is a commodity-linked currency, so as commodity prices increase, the NZD tends to appreciate.
  
• The NZD is one of the most popular currencies to purchase for carry trades, due to New Zealand's high interest rates.

Forex Market in Japan

Currency: Japanese Yen
Common Name: Yen
Quotation Convention: 2 decimal points
Most liquid cross: USD/JPY
Average Bid/Offer : 3 pips (110.70 / 110.73)
1 pip: 0.01 JPY
Settlement: Transaction plus two days (T+2)

Economic Indicators for Japan

• Balance of Payments
  
• Employment Rates
  
• Gross Domestic Product (GDP)
  
• Industrial Production
  
• Tankan Survey
  

Economic Overview
With a GDP of US$3.867trl, Japan has the world's fourth largest economy. Japan is the fifth largest exporter of goods in the world, which has resulted in a consistent trade surplus for the country, valued at US$99.4bln in 2005, and created an inherent demand for the JPY. Japan's largest trade partners are the U.S. and China. In recent years, China's inexpensive goods have allowed the country to gain a larger share of Japan's import market. Japan has a fairly large national debt of US$1.545trl.
Japan is among the world's largest and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles and processed foods. The robotics industry is a key long-term economic strength because Japan possesses more than half of the world's "working robots." As a highly industrialized nation, the country is heavily dependent on imported raw materials and fuels. The small agricultural sector is highly subsidized and protected, with crop yields among the highest in the world.
Japan's economy experienced a major slowdown in the 1990s, following three decades of record growth. Growth expectations during the 1980s led to major hikes in asset prices and rapid credit expansion, developing an "asset bubble." Between 1990 and 1997, the bubble collapsed, resulting in dramatic drops in asset and real estate prices. The net loss was equal to two years of Japan's national output. Many developers defaulted, and the country's banks were faced with bad debt and worthless collateral. The banking crisis had a major impact on the Japanese and global economies, and bad debts, falling stock prices and the collapsing real estate market have continued to plague the Japanese economy for the past two decades. The current economic crisis revolves around the resolution of the banks' non-performing loans (NPLs). The Japanese Ministry of Finance and Bank of Japan (BoJ) are still trying to resolve this problem, and have poured funds into the ailing banks to attempt to prevent bankruptcies and to grow the banks back to a healthier balance sheet. As a result, the banking sector has become very dependent on the government, and the Japanese yen (JPY) is very sensitive to political developments, including speeches by government officials that may indicate changes in monetary and fiscal policy or attempted bailout proposals.
Despite the banking crisis of the 1990s, Japan is still a major economic force. Government and industry cooperation, strong work ethic and rapid technological advances have propelled Japan to the rank of the second most technologically powerful economy in the world after the U.S.

Economic Policy Makers and Tools
The Bank of Japan directs the country's monetary policy, with a goal of maintaining stability of prices and of the financial system, thereby laying the foundations for sound economic development. The BoJ's monetary policy board determines the basic guidelines for monetary policy at its monetary policy meetings. At the policy meetings, the board assesses the economic and financial situation to determine the guidelines for the BoJ's money market operations. The results are released in the Monthly Report of Recent Economic and Financial Developments. The BoJ also releases the quarterly Tankan Survey, an economic survey of Japanese businesses, which is also used to formulate monetary policies.
The Bank of Japan conducts its daily money market operations to achieve a target money market rate by purchasing or selling Japanese government securities and bills, or by making loans to financial institutions. The BoJ supplies funds to financial institutions when it purchases government securities or bills, and absorbs funds when it sells them. Loans extended and collected by the BoJ to financial institutions are another method of controlling fund levels. By adjusting the amount of funds it supplies or takes in, and managing the timing of these adjustments, the BoJ is able to control money market rates. Money market rates, in turn, affect interest rates in other financial markets and the lending rates that financial institutions charge on loans to firms and individuals. In this way, money market rates can affect economic activity by influencing decisions made by firms and individuals.
The Minister of Finance can instruct the Bank of Japan to conduct foreign exchange intervention by buying or selling yen for foreign currencies. When the BoJ intervenes, it uses government funds, specifically those in its Foreign Exchange Fund Special Account (FEFSA). Since the introduction of floating exchange rates, Japan's interventions in the foreign exchange market have primarily taken the form of yen sales because Japan's currency has often faced rapid appreciation. When Japan's Minister of Finance deems it necessary to intervene in the foreign exchange market due to major fluctuations in the yen, he gives the BoJ instructions to conduct intervention operations in the form of foreign currency trades. There are typically three factors behind Japan's foreign exchange interventions: the amount of appreciation or depreciation in JPY, the current USD/JPY rate, and the formation and direction of speculative positions.
The Bank of Japan controls the amount of money in the economy and the interest rate on a daily basis through open market operations. The goal of these open market operations is to control the operating target, which is recognized as the uncollateralized overnight call rate. This is the shortest-term rate, and is seen as the standard rate for longer-term rates in the call market and in other markets. In order to maintain zero interest rates, the BoJ targets zero interest on the overnight call rate through its market operations. This is completed through sales and purchases of money market instruments.

Characteristics and Trends

• Economic or political problems in other Asian economies can have dramatic impacts on the Japanese economy JPY movements, and vice versa.
  
• JPY crosses can become very active toward the end of the Japanese fiscal year (March 31) as exporters move their dollar denominated assets.
  
• The JPY tends to have higher volatility during U.S. hours, and during the Japanese lunch hour, which happens between 10-11 p.m. EST.
  
• Because of Japan's banking crisis and the NPLs, bank stocks movements are closely watched to indicate JPY movements.
  
• Because the JPY has the lowest interest rate of all industrialized countries, it is the primary currency sold in carry trades.

Forex Market in United Kingdom

Currency: Great British Pound
Common Name: Sterling, Cable
Quotation Convention: 4 decimal points
Most liquid cross: GBP/USD
Average Bid/Offer: 4 pips (1.7000 / 1.7004)
1 pip: 0.0001 USD
Settlement: Transaction plus two days (T+2)

Economic Indicators for the United Kingdom

• Employment
  
• Gross Domestic Product (GDP)
  
• Industrial Production
  
• Purchasing Managers Index (PMI)
  
• Retail Price Index (RPI)
  
• U.K. Housing Starts
  

Economic Overview
The U.K. has the seventh largest economy in the world, with a 2005 GDP of US$1.867trl. GDP growth rates slowed from 2001 to 2005, as the high value of the pound and the global downturn hurt the U.K.'s manufacturing and exports. The per capita GDP was estimated to be $30,900 in 2005.
The U.K. is the world's fifth largest importer and the seventh largest exporter. Important trade partners include the U.S., Germany and France. The U.K. has a fairly large trade deficit of $111 billion, and the world's second largest national debt, at $US7.107trl.
The U.K.'s agricultural industry is highly efficient compared to other European countries and produces about 60 percent of the country's food needs with only 1.5 percent of the labor force. Service-oriented occupations such as banking, insurance and business services comprise 79.5 percent of the labor force, and account for the largest portion of the country's GDP. The U.K. has significant coal, natural gas and oil reserves; primary energy production accounts for 10 percent of GDP, one of the highest shares of any industrial nation.
During the past 20 years, the U.K. government has greatly reduced public ownership and limited the growth of social welfare programs. The government has raised public taxes to support education, transportation and health services.
The U.K. economy is one of the strongest in Europe, with relatively low inflation, unemployment and interest rates. Although the U.K. is a member of the European Union, recent public opinion polls have shown that the majority of citizens oppose the U.K. joining the European Monetary Union and adopting the euro, due in large part to the strong performance of the U.K. economy.

Economic Policy Makers and Tools
The Bank of England (BoE) is the central bank of the U.K. The Bank of England was founded in 1694, nationalized in 1946, and gained independence in 1997. The overall goal of the BoE is to promote and maintain monetary and financial stability to contribute to a healthy economy. The BoE has exclusively issued the country's currency since the 1900s, and has been responsible for setting the U.K.'s interest rate since 1997.
The Bank of England's monetary policy committee sets interest rates to meet the inflation target for the U.K. economy. The inflation target is set annually by the Chancellor of the Exchequer, and the BoE implements its interest rate decisions by setting the bank repurchase (repo) rate, which is the interest rate at which the BoE lends to banks and other financial institutions. This is the key rate used in monetary policy to meet the inflation target. The monetary policy committee holds monthly meetings, which are often followed by announcements stating changes in monetary policy and interest rates. The committee also publishes two quarterly reports, the Inflation Report and the Quarterly Bulletin. The report provides growth and inflation forecasts for the following two years, and the bulletin provides analysis of the international economic environment and the impact on the U.K.'s economy.
The Bank of England's open market operations are typically conducted daily through two rounds of operations at the official bank repo rate. If these operations are not sufficient to relieve any liquidity shortage, then there is also an overnight operation and a late repo facility for settlement banks. Overnight operations are conducted at a higher rate than the official rate. The BoE also makes a daily overnight deposit facility at a lower rate than the official rate available to its counterparties. These overnight rates set the upper and lower bands of the market rates and are designed to allow active trading but moderate undue volatility, which could complicate banks' liquidity management and deter the use of money markets by non-financial companies.

British Pound vs. Euro
Monetary policy regarding the argument for and against the adoption of the euro is closely followed. Because the U.K. is presently implementing successful monetary and fiscal policies, the country has outperformed most major economies, including the EMU. The majority of voters see no reason for the U.K. to join the EMU, especially since the EMU has faced problems with implementing a single monetary authority for its 12 member countries.
Government officials in the U.K. are highly concerned with voter approval ratings. If voters do not fully support entry into the EMU, the likelihood of entry greatly declines. Any speeches and comments from government officials regarding the EMU, especially from the U.K.'s prime minister or treasury chancellor, and relevant public opinion polls, will impact the currency markets. Favor toward adopting the euro tends to put downward pressure on the British pound (GBP), while opposing entry typically boosts the GBP. In order for the U.K. to adopt the euro, interest rates would have to decrease significantly, and an interest rate decrease would encourage traders to sell GBP. The British pound would also weaken because of the uncertainties involved in deciding to adopt the euro.

Characteristics and Trends

• GBP/USD is one of the most liquid currency pairs in the world, with 6% of all currency trading involving GBP as either the base or counter currency.
• GBP has one of the highest interest rates among major markets.
  
• Interest rates between U.K. Gilts/U.S. Treasuries and UK Gilts/German Bunds are watched as potential currency movement indicators, as they indicate the differentials in premium yield in fixed income assets.
  
• Three-month Euro-sterling futures are watched to predict U.K. interest rate changes, which affect GBP values.
  
• Energy production makes up 10 percent of the U.K.'s GDP, which results in a positive correlation between the energy prices and the GBP.